If you're trying to be financially responsible and have your fiscal ducks all in a row, it might seem sensible to sign up for "pre-need" funeral insurance to (eventually) cover the cost of your funeral or that of a loved one.
Hold on, though. While it's indeed smart to save for funeral expenses and to discuss funeral plans and preferences with loved ones, pre-need funeral insurance isn't a great deal for most of us.
That's surprising, though, if you spend any time reading communications from those who sell pre-need funeral insurance. One insurance seller explains:
Preneed life insurance is an insurance policy whose benefits cover the cost of the predetermined expenses of a funeral, cremation or burial. The expenses typically include standard funeral home services, funeral merchandise, church services and even burial services and merchandise. The purpose of preneed life insurance is to set aside funds for your funeral, before the need arises, thereby protecting your loved ones and your financial assets.
Another stresses that, "By planning now, you can help alleviate the stress and financial burden of your funeral arrangements, limiting your loved ones to their emotional struggles." This vendor also mentions some "key benefits" such as peace of mind for you and your loved ones, as well as the ability to "be remembered the way you want."
Nuts and bolts
Pre-need "arrangements," as they're sometimes called, are typically made with mortuaries, cemeteries, and/or insurance companies. The benefit of such plans is that, when you move on to the great beyond, your loved ones won't have many arrangements to make. They'll be able to focus mainly on mourning, because plots will have been chosen and paid for, along with the funeral and burial. So far, so good, right?
Not so fast
The downside of pre-need funeral insurance is that it tends to cost a lot of money. And that pile of money will be out of your hands and earning interest -- not for you, but for the people you paid.
Let's say you're aged 75 and you pay $5,000 for a cemetery plot and $10,000 for your casket and various services. That's well and good, but what if you're blessed and live another 20 years? You've lost the benefit of that $15,000 for a long time. If you had invested it and earned 10% per year on it, you'd have $101,000 to show for it! That would likely be enough to cover any death expenses -- and leave some shekels to your loved ones as well. Another consideration is that you might actually need that $15,000 at some point before you die.
Pre-need plans are often nonrefundable -- and often nontransferable, meaning you can't change your mind or switch mortuaries. They often have hidden fees, meaning your survivors could still wind up forking over plenty of money when you die. Plans can be mishandled, too.
Pre-need insurance has many critics -- even some within the funeral industry. The New York State Funeral Directors Association, for example, has a page on its website titled "NYSFDA is Opposed to Preneed Funeral Insurance," it lists many reasons for its opposition, including the following:
- "There is great potential to do what is not best for the consumer because of the motivation to make commissions."
- "These types of small policies are extremely expensive, and do not grow in order to combat inflation."
- "If the consumer stops paying for any reason, the person loses all benefits."
- "Preneed funeral insurance is sold in a way that leads our families to believe that it will completely pay all at-need costs even though that is rarely the case."
Instead of getting pre-need insurance, you might set up a pre-need funeral trust. Such a vehicle lets you put money aside for funerals but also offers advantages such as portability, earned interest that can help keep up with inflation, and no sales commissions. Trusts are irrevocable, though, and not widely used.
Another option is to simply set up a special account where you save money to cover funeral expenses. It can be invested in any way you like and will not be locked into any arrangement. Ideally, pair that with discussions with loved ones so that everyone is aware of each others' wishes.